7 predictions for 2014, 5 of them probably true

Chuck Jaffe’s 2014 forecast for the mutual fund industry

People use a lot of different methods for telling the future, from numbers to mirrors to random dots made on paper, tarot cards, reading the smoke from an altar, dropping hot wax onto water and more.

Most aren’t particularly reliable.

Investors excited about the market at the wrong time

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With the stock market ending the year much better than was expected, even the worrywarts seem to have come out of the woodwork. Chuck Jaffe joins MoneyBeat. Photo: Getty Images.

In nearly 20 years of covering the mutual fund business, I’d like to think my annual forecasts for what will happen in the industry in the year ahead have been significantly more accurate. I have typically gotten about three-fourths of my prognostications right—and when I’m off, typically, it’s more a case of being “early” than flat-out wrong—which I suspect is more reliable than most star-gazing methods.

If that’s the case, then there’s a good chance that at least five of the following items will become stories that dominate the mutual fund world in the year ahead. These stories won’t command the news or control the economy, but they will set the tone for how investors feel about funds and ETFs a year from now.

The worst of the financial crisis of 2008 is already gone from five-year track records; the rest will be gone by the end of March.

Nobody is going to be pushing 15-year returns—about 4.5% annualized on the Standard & Poor’s 500, including bear markets starting in 2000 and ’08—or 10-year gains (roughly 7.25% on the S&P) when they can hype double-digit gains like the 17% annualized the index has delivered over the last five years.

At a time when investors are feeling optimistic—hoping that the strong results from 2013 can somehow continue unabated—this is the number investment firms will focus on, because they know that pushing recent short-term numbers as if they can happen again is irresponsible. The five-year time frame is a bit reckless right now too, but that’s not going to bother the fund world.

2. Unpleasant tax surprises from some big 2013 winners.

With all of the tax-loss carryforwards from 2008 exhausted, funds are again building up large positions that will generate taxable distributions.

No one minds these payouts in a year like 2013, when funds are way up and the taxes feel like a cost of doing business.

But if market forecasts are correct that returns will be in low- to mid-single digits, funds could lock in gains and generate tax bills that equal or eclipse their growth; when that happens—mediocre returns with over-sized tax bills—it creates unhappy investors.

3. Big-name invaders into the ETF space.

Truthfully, I made this call a year ago and it did not happen, due largely to the ineffectiveness of the U.S. Securities and Exchange Commission. That logjam should break this year.

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